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Page 4 of 9 <br />City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org <br />Landlords who wish to file a FRR appeal must file the appeal within 10 calendar days of completing the <br />substantial remodel. The City went through a request for proposals process and is contracting with a <br />neutral, third-party appeal officer who will review the appeal and issue a final decision within 30 business <br />days. Landlords must notify tenants of their right to return and the Fair Rate of Return Rent (if approved) <br />upon re-renting within 10 calendar days of receiving the appeal decision from the City. <br />Table 1 below is a more detailed overview of the process (and the guidelines include specific <br />calculation formulas and illustrative examples). <br />Table 1 – Fair Rate of Return Appeal Process Overview <br />Step Process Explanation <br />Step 1 The Baseline Stabilized Rent is <br />calculated, which is the Right <br />to Return Rent plus the <br />projected rent increases two <br />years after the substantial <br />remodel is completed. <br />A two-year projection was selected to allow for post <br />construction occupancy and expenses to stabilize, which <br />represents a conservative, standardized rent level after <br />the market has “settled” following the remodel. <br />This rent also assumes a minimum 5% annual increase, <br />as allowed under state law, which employs a <br />conservative approach in the calculation considering <br />that historically annual allowed increases have been <br />higher than the 5% minimum. <br />Step 2 The substantial remodel costs <br />that could be supported by <br />the Baseline Stabilized Rent <br />are calculated by using the <br />average prevailing market <br />capitalization rate (cap rate) <br />from Coldwell Banker Richard <br />Ellis (CBRE) for the San <br />Francisco Metropolitan Area. <br />The CBRE cap rate was selected as it is publicly available, <br />has specific cap rate data for the Bay Area, and comes <br />from a well-known and widely used real estate services <br />firm. <br />Step 3 Lastly, a feasibility test is <br />applied to determine whether <br />the substantial remodel costs <br />that could be supported by <br />the Baseline Stabilized Rent <br />are higher or lower than the <br />actual substantial remodel <br />costs <br />If actual substantial remodel costs are less than the <br />remodel costs that could be supported by the Baseline <br />Stabilized Rent, then no further rent increase is <br />warranted. <br />If actual substantial remodel costs are higher than the <br />remodel costs that could be supported by the Baseline <br />Stabilized Rent, then a higher rent increase can be <br />granted to ensure a fair rate of return (see step 4). <br />Step 4 As applicable, the Fair Rate of <br />Return Rent is calculated <br />using the same cap rate but <br />based on the actual costs of <br />the substantial remodel. <br />In calculating actual substantial remodel costs, the <br />guidelines allow for 100% of the remodel costs to be <br />included, so long as they can be verified through <br />receipts. The guidelines also allow landlords to include <br />the cost of relocation assistance paid to the tenant as <br />part of their remodel costs, recognizing that the <br />payment of relocation assistance is part of the <br />investment costs in undertaking the remodel. While <br />forgone rental income is not included in the calculation <br />of the substantial remodel costs, the remodel work can <br />8.A. - Page 4 of 85 <br />262